Facts vs. Fiction: Conservatives Claims About Small Business Taxes Are Bogus

By Pat Garofalo
Posted on November 15, 2010, 9:00 am

The Bechtel Corporation. PriceWaterhouseCooper. The Tribune Company. These are not the sort of companies that immediately jump to mind when one hears the phrase “small business.” Nor is the prominent buyout firm Kohlberg, Kravis and Roberts or every partner in big-city law firms. But if conservatives in Congress have their way, the owners of these behemoths of U.S. business are going to receive a tax cut next year—under the guise of tax relief for small businesses.

When Congress convenes for a lame-duck session this month, one of the most prominent issues it will tackle is how to deal is the pending expiration of the Bush tax cuts. Due to a Bush-era budgeting gimmick, income tax rates are scheduled to reset on January 1, 2011 to where they were in 2000.

President Obama and many congressional Democrats propose that we permanently extend tax rates for the lower and middle classes—those households making less than $250,000 per year—while allowing the rates for the richest 2 percent of Americans to expire. Conservatives, however, insist on extending all of the tax cuts. And when President Obama suggests “decoupling” the tax rates, or permanently extending those for the lower and middle classes while temporarily extending those for the rich, incoming House Majority Leader Eric Cantor (R-VA) bluntly replied: “No.”

Conservatives in Congress want to claim the mantle of fiscal responsibility, but extending the Bush tax cuts for the rich costs $830 billion over 10 years (including the cost of debt servicing). So some sort of justification for such a budget-busting move was necessary, and conservatives found it in small businesses.

“On this side, we hear the small business people loud and clearly,” said Sen. Chuck Grassley (R-IA). “To those who are pushing the higher marginal rates, I say the burden is on you to show that you are not harming our primary job creators, small business.” And Sen. Orrin Hatch (R-UT) added, “This is about stopping a job-killing tax hike on small businesses during tough economic times."

But according to the Joint Committee on Taxation, just 3 percent of people with any business income at all—from an enterprise large or small—face either of the top two income tax brackets, which are the ones in question. Conservatives eventually conceded this point, but pivoted to the literal number of “small businesses” that they claim will be affected if the tax cuts for the rich expire.

“That’s 750,000 small businesses in America, the most productive, the ones that are the most successful, getting hit by a tax increase on top of everything else that’s happened to them in the last 18 months of this administration,” said Senate Minority Leader Mitch McConnell (R-KY). But McConnell’s number is only accurate if you take an incredibly expansive view of what constitutes a small business.

Included in that 750,000 is the Bechtel Corporation, the largest engineering firm in the country. It is the fifth-largest privately owned company in the United States, posting gross revenue in 2008 of $31.4 billion. The number also includes the Wall Street buyout firm Kohlberg, Kravis and Roberts, which has more than $54 billion in assets and 14 offices around the globe. The auditing firm PricewaterhouseCoopers, which has operations in more than 150 countries, fits the bill as well.

The reason conservatives cite these companies as “small businesses” is that they are “pass-through” entities, meaning that instead of paying the corporate income tax, they “pass-through” their earnings to individual owners, who claim the profits on their personal income tax returns. There are legitimate reasons for incorporating in this fashion, but it is also a way for large companies to avoid taxes. The Tribune Company—the nation’s second-largest newspaper publisher, and another conservative “small business”—saved $1.8 billion in taxes by changing to a pass-through corporation, according to Citizens for Tax Justice.

Also included in that 750,000 is every partner in a law firm, anyone earning money from a hedge fund investment, every passive investor in an oil or gas venture, and anyone with a trust fund. “Every student who is a part-time web designer, partner in a law firm with a billion dollars of revenue and investor in a hedge fund gets lumped together in the data, along with real small businesses,” said Edward Kleinbard, a former staff director of the Joint Committee on Taxation.

In fact, under the conservative definition of a small business, both former President George W. Bush (via his investments in oil companies) and President Obama (because of his book deals) are “small businesses.”

So here are the facts. Exceedingly few small businesses will be affected if the Bush tax rates for the rich expire, and those that are will be making enough money to be paying in the top two income tax brackets. At the end of the day, just 12 percent of the revenue raised by allowing those tax breaks to expire will be paid by business people with employees, according to the Congressional Research Service.

Plus, extending the Bush tax cuts is the least effective tax or spending step for job creation, according to the Congressional Budget Office. Every dollar spent extending those tax breaks results in just 10 cents to 40 cents of economic activity. If conservatives are truly concerned about boosting the economy, they could propose allowing the Bush tax cuts for the rich to expire, but use the revenue for a year or two on an actual job program.

But they don’t do that because what conservatives want is for marginal tax rates on the rich to be as low as possible—no matter what the effect on the deficit and regardless of whether the revenue raised could be put to use helping working-class people cope with the lingering effects of the Great Recession. This is not fair to majority of Americans who will pay the interest on the money borrowed to give the rich this new tax break. And this is an inefficient and ineffective way to create jobs and drive sustained economic growth.

The progressive alternative is fair, efficient, and effective tax policy to create jobs and help our economy recover from the Great Recession. Let’s deal with facts in this debate, not myths.

Pat Garofalo is a Senior Economics Researcher at the Center for American Progress and a Blogger at the Center for American Progress Action Fund.